CHINA: RATES FALL, DEFAULTS EXPECTED TO RISE

China’s banks have cut the prime rate on one-year loans to 4.05 percent, down 0.10 percent. The cut had been expected as the government is taking measures to stimulate the economy in the midst of the continuing economic slowdown, now worsened by the coronavirus epidemic.
S&P Global Ratings has warned that the ongoing, long-term decline could leave banks holding as much as $1.1 trillion in bad loans.
S&P also warns if the virus doesn’t peak until April, China’s 2020 growth rate could slow to 4.4 percent, but if it peaks in March, the growth rate could hit 5 percent.
Both mark a sharp drop from last year’s 6.1-percent pace which, while a strong number compared to Europe and U.S., China’s GDP rate was at a 29-year low.
To date, the Chinese government says there are 77,600 confirmed coronavirus cases and 2,663 died from the disease. The number of new cases in China dropped dramatically in recent days outside the province, which is at the center of the epidemic.
Last week, Chen Yulu, a deputy governor of the People’s Bank of China, said economic damage from the virus “will not last long,” stating that “the sound fundamentals of China’s economy in the medium and long term remain unchanged.”
The Chinese government has “sufficient policy space” and a “rich policy tool kit” to cope with the faltering economy, he added.
He also noted that the bank has maintained normal monetary policy instead of delving into negative interest rates and has enacted more than 30 policy measures to see small and medium-size businesses, manufacturing, private enterprises, and troubled banks through the virus crisis.
The Chinese economy “will recover rapidly,” he predicted.
TREND FORECAST: We forecast that Chen is wrong.
 China’s interest rates are in negative territory. Considering the January 2020 inflation rate in China ranged at 5.40 percent, with their rates at 4.04 percent, they are, in fact, deep in negative territory. To push economic growth, the government will continue to lower rates, provide subsidies, and inject funds into banks and businesses in efforts forestall deeper meltdowns.
 Already trapped in stagflation, China’s monetary and fiscal stimulus programs will push the nation deeper into debt, pushing inflation higher while weakening their currency, the yuan.
 Thus, the government will do what they can to stop currency outflows, as those with money and investment seek safe haven currencies and assets such as gold.